My main reservation here is that while Steel Dynamics carries a lighter debt load than Nucor ($1.8 billion net of cash, versus Nucor’s $2.5 billion net debt position), Steel-D’s debt load is bigger relative to its small market cap of just $3.3 billion. So while on the surface, this stock pick looks more attractive, beware: If interest rates start rising, it could be even riskier than Nucor.
Commercial Metals Company (NYSE:CMC)
Riskiest of all Longbow’s bets is Commercial Metals Corporation. Smaller than either Nucor or Steel Dynamics at a market cap of only $1.9 billion, the company shares Steel-D’s debt “issues” as it carries more than $1 billion of debt net of cash. CMC’s akin to Nucor, meanwhile, in that it’s not generating nearly as much cash as you might think from reading its income statement. Free cash flow for the past year was a paltry $15 million — barely a tenth of the company’s near-$150 million in reported earnings.
Result: If Commercial Metals Corporation looks like the cheapest of the three stocks discussed so far, with a P/E ratio of less than 13, well… the stock’s cheap for a reason. Between high debt and low cash production, CMC is actually the worst of the three options Longbow has recommended so far.
And U.S. Steel
Finally, and more of a side note than a recommendation, we learned from StreetInsider.com yesterday that at the same time it was upgrading its peers to full-blown buy status, Longbow upped its rating on USX to only neutral.
Why? No mystery here: Unprofitable on a trailing-12-month basis, and carrying a net-debt load fully 10% greater than its own market cap, USX looks riskier than any of the stocks Longbow actually recommended this week. That said, there are factors weighing in USX’s favor.
For example, while technically “unprofitable,” USX did generate $412 million in free cash flow last year. That’s more than anyone else discussed so far. It’s enough cash profit to give this stock a 15.3 enterprise value-to-free cash flow ratio and, if you’re willing to ignore the debt (hint: Don’t ignore the debt), a price-to-free cash flow ratio of only 7.1. At 8% projected growth, this latter number looks good. But honestly, while I’m not sure USX deserves to be singled out as the only steel stock Longbow doesn’t absolutely love… it’s still not cheap enough to deserve your hard-earned investing dollars.
The article This Just In: More Upgrades and Downgrades originally appeared on Fool.com and is written by Rich Smith.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Nucor.
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